1. Madsen Motors’s bonds have 10 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 7%, and the yield to maturity is 8%. What is the bond’s current market price? Round your answer to the nearest cent.

$

2. A bond has a $1,000 par value, 20 years to maturity, and a 5% annual coupon and sells for $860.

What is its yield to maturity (YTM)? Round your answer to two decimal places.

%

Assume that the yield to maturity remains constant for the next two years. What will the price be 2 years from today? Do not round intermediate calculations. Round your answer to the nearest cent. $

3. An investor has two bonds in his portfolio that have a face value of $1,000 and pay an 11% annual coupon. Bond L matures in 18 years, while Bond S matures in 1 year.

What will the value of the Bond L be if the going interest rate is 5%, 7%, and 12%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 18 more payments are to be made on Bond L. Round your answers to the nearest cent.

5% 7% 12%

Bond L $

$

$

Bond S $

$

$

Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?

The change in price due to a change in the required rate of return decreases as a bond’s maturity increases.

Long-term bonds have lower interest rate risk than do short-term bonds.

Long-term bonds have lower reinvestment rate risk than do short-term bonds.

The change in price due to a change in the required rate of return increases as a bond’s maturity decreases.

Long-term bonds have greater interest rate risk than do short-term bonds.

4. Ten years ago the Templeton Company issued 26-year bonds with a 10% annual coupon rate at their $1,000 par value. The bonds had a 9% call premium, with 5 years of call protection. Today Templeton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places.

%Why should or should not the investor be happy that Templeton called them?

Investors should be happy. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns.

Investors should be happy. Since the bonds have been called, investors will no longer need to consider reinvestment rate risk.

Investors should not be happy. Since the bonds have been called, interest rates must have fallen sufficiently such that the YTC is less than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates.

Investors should be happy. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they can now do so at higher interest rates.

5.

Harrimon Industries bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 10%.

What is the yield to maturity at a current market price of

$867? Round your answer to two decimal places.

%

$1,154? Round your answer to two decimal places.

%

Would you pay $867 for each bond if you thought that a “fair” market interest rate for such bonds was 14%—that is, if rd = 14%?

You would buy the bond as long as the yield to maturity at this price equals your required rate of return.

You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.

You would not buy the bond as long as the yield to maturity at this price is less than the coupon rate on the bond.

You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.

You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.

6. Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 8% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond’s market price has fallen to $917.30. The capital gains yield last year was -8.27%.

What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.

%

For the coming year, what are the expected current and capital gains yields? (Hint: Refer to Footnote 6 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answers to two decimal places.

Expected current yield:

%Expected capital gains yield:

%

Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ?

As rates change they will cause the end-of-year price to change and thus the realized capital gains yield to change. As a result, the realized return to investors will differ from the YTM.

As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors will differ from the YTM.

As long as promised coupon payments are made, the current yield will not change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors should equal the YTM.

As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors should equal the YTM.

As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will not cause the price to change and as a result, the realized return to investors should equal the YTM.

7. It is now January 1, 2021, and you are considering the purchase of an outstanding bond that was issued on January 1, 2019. It has a 9.5% annual coupon and had a 30-year original maturity. (It matures on December 31, 2048.) There is 5 years of call protection (until December 31, 2023), after which time it can be called at 108—that is, at 108% of par, or $1,080. Interest rates have declined since it was issued, and it is now selling at 116.57% of par, or $1,165.70.

What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.

%What is the yield to call? Do not round intermediate calculations. Round your answer to two decimal places.

%

If you bought this bond, which return would you actually earn?

Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.

Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.

Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.

Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

-Select-

Item 3

Suppose the bond had been selling at a discount rather than a premium. Would the yield to maturity have been the most likely return, or would the yield to call have been most likely?

Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.

Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.

Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.

8. Nesmith Corporation’s outstanding bonds have a $1,000 par value, a 6% semiannual coupon, 16 years to maturity, and an 8% YTM. What is the bond’s price? Round your answer to the nearest cent.$

9. A firm’s bonds have a maturity of 10 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 5 years at $1,051.80, and currently sell at a price of $1,099.93. What are their nominal yield to maturity and their nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places.YTM:

%YTC:

%What return should investors expect to earn on these bonds?

Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.

Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.

Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.

10. A 9% semiannual coupon bond matures in 5 years. The bond has a face value of $1,000 and a current yield of 8.8373%. What are the bond’s price and YTM? (Hint: Refer to Footnote 6 for the definition of the current yield and to Table 7.1) Do not round intermediate calculations. Round your answer for the bond’s price to the nearest cent and for YTM to two decimal places.Bond’s price: $

YTM:

%

11. Lourdes Corporation’s 14% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 30 years, are callable 4 years from today at $1,025. They sell at a price of $1,275.76, and the yield curve is flat. Assume that interest rates are expected to remain at their current level.

What is the best estimate of these bonds’ remaining life? Round your answer to the nearest whole number.

years

If Lourdes plans to raise additional capital and wants to use debt financing, what coupon rate would it have to set in order to issue new bonds at par?

Since the bonds are selling at a premium, the coupon rate should be set at the going rate, which is the YTC.

Since the bonds are selling at a premium, the coupon rate should be set at the going rate, which is the YTM.

Since Lourdes wishes to issue new bonds at par value, the coupon rate should be set the same as that on the existing bonds.

Since Lourdes wishes to issue new bonds at par value, the coupon rate should be set the same as the current yield on the existing bonds.

Since interest rates have risen since the bond was first issued, the coupon rate should be set at a rate above the current coupon rate.

12. You are considering a 30-year, $1,000 par value bond. Its coupon rate is 10%, and interest is paid semiannually. If you require an “effective” annual interest rate (not a nominal rate) of 9.2025%, how much should you be willing to pay for the bond? Do not round intermediate calculations. Round your answer to the nearest cent.$

13. Last year Janet purchased a $1,000 face value corporate bond with a 12% annual coupon rate and a 20-year maturity. At the time of the purchase, it had an expected yield to maturity of 12.13%. If Janet sold the bond today for $1,139.23, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places.

%